Price volatility puts steel makers in a fix over viability of captive ore

While Tata Steel believes procuring via auction is better, Sajjan Jindal's JSW Steel is going all out to bid for mines in order to have captive ore resource for backward integration

Fluctuating iron ore prices amid growing demand for steel in the domestic market has led to a dilemma among primary domestic steel producers on whether or not to have captive iron ore resources.

While Tata Steel, the country’s oldest steel producer, is of the view that procuring raw material via auction is a better option, Sajjan Jindal-led JSW Steel is going all out to bid for mines in order to have captive ore resource which can help company strengthen its backward integration.

“In an auction, one (the company) has an option to choose the kind of material (iron ore) you want unlike captive source where we (Tata Steel) have to use whatever the captive resource is offering,” T V Narendran, chief executive officer and managing director of Tata Steel said. 

For Tata Steel’s India operations, the company has to use its captive iron ore which has an alumina content of 2.4 percent, whereas for its Europe facility, where the company is procuring ore from the market, it is choosing ore of a relatively lesser alumina content of 1.2 percent. Tata Steel Europe buys ore from a basket of suppliers such as Brazil, Russia, Canada, Norway, South Africa and Sweden.

High alumina in iron ore raises levels of alumina in blast furnace slag leading to adverse effects of the same on the latter.

“As our capacities increase, our requirement for ore will also go up and we can go up to 38 million tonne of iron ore via captive. So to that extent, the supply is ensured but as you see (citing the alumina example) everything has its own pros and cons,” Narendran added.

Tata Steel sources its current iron ore requirement of 25 million tonne from mines and quarries at Noamundi, Joda East, Katamati and Khondbond located in areas of Jharkhand and Odisha. The company has environment clearance for its iron ore mines valid until 2030.

Apart from Tata Steel, state-owned Steel Authority of India (SAIL) is the only steel producer which has its entire requirement of iron ore being met via captive mines. 
 

On the other hand, Naveen Jindal-led Jindal Steel & Power (JSPL) has its partial requirement of iron ore met via Tensa mine in Odisha. JSW Steel too largely relies on auctioned and imported ore to meet its requirement. However, the company has recently managed to bag six mines in Karnataka of which three are operational and balance will be up in next two months. The six mines are to produce 5 million tonne which will fulfill 25 percent requirement of Vijayanagar steel plant.

“Even if auctioned ore allows us to choose the ore we want, there is no guarantee that what we want is always available in the auction. So basically, there is no clarity on what quality of ore we are going to procure even if we know what quality we want,” explained Vinod Nowal, deputy managing director of JSW Steel. 

Even today, the Mumbai-based company is the largest buyer of NMDC iron ore in Karnataka. JSW Steel lifts about 60-70 per cent of the ore produced by NMDC to cater to its 12 million tonne plant at Vijayanagar. The company has a total requirement of 21 million tonne and also lands up buying ore from outside of Karnataka for its plant in the state.

“Price advantage and uninterrupted supply are other two reasons to have captive ore supply and even if the quality of ore is not up to expectations we would be in a better position to handle the situation as there is clarity on what we are having with us as the ore resource,” said Nowal.

Iron ore and coking coal are the two key raw materials used in the making of steel. The two commodities form nearly 40 percent of the total cost of production of steel and hence pricing scenario of the two is crucial.  Captive iron ore supply ensures uninterrupted supply of ore for the company keeping it insulated from price fluctuations. 

As per ICRA Ratings, domestic steel consumption growth is seen at 7 per cent this fiscal largely driven by the government’s focus on the infrastructure sector.

Meanwhile, prices of ore in the global as well as domestic market have been largely rising. Internationally, the decision by Brazilian mining company Vale SA to halt production at ten sites in Brazil following dam disaster has affected deliveries of iron ore pellets to clients leading to spurt in prices. In the domestic market, issues of inferior iron ore getting priced higher mainly in Karnataka, has been leading to price fluctuations of the ore in the market.

Clearly, steel players seem to be finding the grass greener on the other side of the fence. 

POINTERS

*Tata Steel gets captive iron ore from Noamundi, Joda East, Katamati and Khondbond mines

* JSW Steel's total ore requirement stands at 21 million tonne, Tata Steel needs 25 million tonne iron ore

*JSW Steel to produce 5 million tonne iron ore from 6 recently acquired captive mines

*JSW Steel captive mines to ensure 25% ore supply for Karnataka plant